Figures showing Japan’s economy shank sharply in the final quarter of 2008, recording its biggest quarterly decline since 1974, helped perceived safe-haven currencies such as the dollar and the yen, propelling the dollar index to a two-month high.

Meanwhile, the lack of reference to yen strength in the final communique of Group of Seven finance ministers meeting in Rome at the weekend allowed investors to resume buying the Japanese currency.

“The data out of Japan was nothing short of shocking and there is a building sense that there are more problems ahead for the global economy,” IDEAglobal senior strategist Maurice Pomery said. This has helped support the dollar and the yen, he added.

The euro came close to a two-month low against the dollar, while sterling was near a two-week trough, with both weighed by heightened risk aversion in the market as European equities fell 1 percent.

The single currency was also pressured by fresh worries about western European banks’ exposure to troubles in eastern Europe as S&P rating agency warned it could cut the sovereign ratings of Ukraine due to refinancing concerns.

“Continuing problems with eastern European emerging markets will keep the dollar bid against the euro,” IDEAglobal’s Pomery said.

He noted, however, that trading was relatively subdued, with U.S. markets closed for a public holiday.

At 1119 GMT the dollar index was at 86.690, just shy of an earlier two-month high of 86.871, according to Reuters data.

The euro fell 0.8 percent against the U.S. currency at $1.2758 and the pound lost 1 percent to $1.4236 .

The pound also lost ground as the G7 meeting did not mention the recent sharp fall in the value of the UK currency as many in the market had expected.

Against the yen the euro dropped 1.2 percent to 117.09 yen , while the dollar dipped 0.2 percent to 91.76 yen .

The dollar earlier briefly edged into positive territory against the yen after Japanese finance minister Shoichi Nakagawa said he would resign if asked to after coming under fire for his behaviour at a G7 news conference.

It quickly turned back into the red, however, as Nakagawa said Prime Minister Taro Aso had asked him to stay on in the job, adding that he had been affected by medicine he was taking for a cold at the G7 meeting.

TRICHET EYED

With U.S. interest rates now standing at between zero and 0.25 percent and UK rates at 1 percent and expected to fall further, the focus is on what the next move will be by euro zone policymakers.

Speaking on Saturday, European Central Bank president Jean-Claude Trichet said the ECB had not drawn any particular conclusions after discussions with other banks.

Trichet is due to speak on Monday afternoon and investors will be watching closely for any clues on how much more the central bank is likely to cut rates and whether it is considering unconventional measures to boost the money supply.

“Trichet could be another hitch for the euro if it opens the door to another rate cut,” Commerzbank currency strategist Antje Praefcke said.

The ECB left rates on hold at 2.0 percent in February but it is widely expected to cut rates in March in an attempt to bolster a flagging euro zone economy.

Meanwhile, recession fears intensified after data showed an unprecedented slump in exports caused Japan’s economy to shrink by 3.3 percent in October-December, the sharpest fall since the first oil crisis in 1974.

Analysts said the grim figures weighed on higher-yielding currencies, with the Australian dollar particularly weak on concerns about a hit to its trade with Japan.

The Australian dollar was down 1.2 percent against the U.S. dollar at $0.6490 .

The dollar and the yen fell sharply against the euro on Friday as a rally in stocks around the world and fresh government aid for U.S. banks revived investor optimism and some risk appetite.

The euro also was recovering from a sell-off in the previous session as traders reassessed European Central Bank President Jean-Claude Trichet’s comments following the ECB’s decision to cut rates by a half percentage point to 2 percent.

“We have a much healthier risk appetite. That’s definitely helping the euro,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

The market was re-thinking the implications of comments on Thursday by Trichet, who said any further ECB rate cuts will be postponed until March at the earliest and dismissed the idea of cutting rates close to zero, as the United States and Japan had, analysts said.

“Essentially, there’s going to be a floor on European rates…which will leave the euro with a moderately higher yield than the dollar and the yen,” Schlossberg said.

In early trading in New York, the euro gained 1.2 percent to $1.3314 , rebounding from a five-week low of $1.3025 hit on Thursday, according to Reuters data.

The euro rallied 2.1 percent to 120.52 yen , while the dollar gained 0.8 percent to 90.51 yen .

Risk appetite picked up on Friday with stocks rallying after Bank of America received a $20 billion government capital injection, overshadowing signs of more fallout from the credit crisis for the financial sector.

Those measures along with the prospect of another bank lending package in Britain eased investor concerns and boosted higher-yielding currencies such as the Australian and New Zealand dollars.

“The fact that we are now seeing the U.S. and even UK authorities looking at further help for the financial and banking system have provided some relief,” BNP Paribas senior currency strategist Ian Stannard said in London.

“While the equity market rebound continues, we’re likely to see euro/dollar maintain its current recovery,” he added.

The dollar lost more ground against the euro after a Treasury Department report showed investors sold U.S. Treasury bonds in November for the first time since August 2007, when the credit crunch began. Foreign selling of U.S. Treasuries amounted to $22.88 billion compared with inflows $32.87 billion the previous month.

Net capital inflows into the United States fell to $56.8 billion in November from a revised inflow of $260.6 billion in October, according to the report.

MORE AID

The aid for Bank of America followed the U.S. Senate’s decision to allow the second half of a $700 billion bank bailout program, handing an early political victory to President-elect Barack Obama, who will be sworn in next Tuesday.

Also, Democratic leaders in the House of Representatives have unveiled an $825 billion tax cut and spending bills they hope will help Obama reverse the economic slump, offsetting fears of soaring losses at the top three U.S. banks.

The Australian and New Zealand dollars gained 1.8 percent and 2 percent versus the U.S. currency respectively .

Sterling also surged, rising 2.1 percent to $1.4953.

Despite the boost from the news about government aid,worries about the banking sector were not far from investors’ minds, as Citigroup and Bank of America both reported a fourth quarter loss. Citigroup also said it would split into two operating units.

Meanwhile, Ireland nationalized its third largest lender, Anglo Irish Bank .

NEW YORK, Jan 16 (Reuters)

The euro is trading at a one month low this morning, and the high yielders are getting stepped on again after enjoying a month a risk taking in the sun. That about explains everything, so I’ll go the Big Finish now… Gotcha! Let’s see what else is up on this cold and blustery Terrific Tuesday…

So… It looks as though Risk Aversion is reigning supreme once again. I just don’t buy into the dollar being the “safe haven” with all that’s going on here. But, that’s the way it is, and I can’t change it. On a side bar, I used to have a customer that was convinced that I could move the markets with the Pfennig… I always thanked him for his complimentary remarks, but would hang up and have a chuckle, as IF I could change the way things are with my simple, humble little newsletter!

OK, enough of that! Yesterday, the data cupboard was empty, but gets restocked today, and it starts with a bang right out of the starters blocks this morning with the Nov. Trade Deficit. You may recall that in December, the Trade Deficit was forecast to narrow, based on the collapse in Oil prices, but instead, the Trade Deficit widened, surprising even yours truly. Well, the song remains the same, as most “experts” believe the Trade Deficit will have narrowed in Nov. due to the collapse in Oil prices. I guess, since I’m from Missouri, I’ll have to be shown! But, really… I don’t see how the Trade Deficit doesn’t narrow, given the state of the recession in this country!

This is a double edged sword for the dollar… On one side, the dollar should gather steam on the fact that the Trade Deficit is narrowing… On the other side, the dollar will see some that want to sell it, based on the fact that if the Trade Deficit is narrowing, and exports aren’t the main reason, it means that Consumers aren’t buying… And when you have an economy that is driven by consumer spending… That’s a problem folks… A real problem….

Now… If the Trade Deficit were to be narrowing because of exports, now then we’d have lightening in a jar! Of course if that were happen, we would be seeing a much weaker dollar… But then, look at Japanese yen… One would have to wonder if that currency can get any stronger VS the dollar! Japanese yen traded briefly yesterday with an 88-handle… It’s hovering just above 89 this morning.

I’ve see it trade down to 85, in my years as a currency trader… Before the Asian crisis of 1998… So… It’s not like these are uncharted waters for yen!

Recall last week, when I told you that the pound sterling’s rise after their rate cut was, in my opinion, a short term trade? In fact, here’s exactly what I said on Friday, Jan. 9th… “But in my humble opinion, I would view this rally as an opportunity to look to sell at these higher levels, because my view on the pound is not good…” Well… That certainly looks like I nailed it, eh? As pound sterling traded Friday morning at 1.5260, and this morning it is 1.4635! OUCH!

Well… We’re supposed to follow Big Ben Bernanke’s words as he speaks in London this morning… He’ll even have a Q&A session following his speech… The markets will be hanging on every word to get an idea of what’s on Ben’s mind… Me? I already know what’s on his mind… He’s on a mission to defeat deflation… And he’ll do anything to defeat deflation, and worry about the consequences like stoking inflation problems, later…

We’ll also have the Fed Vice Chairman, Kohn talking about TARP today… I’ll be following this one, as I’m interested in what Kohn has to say about the over $500 Billion already spent and nothing to show for it… I saw yesterday, where the President-elect wants control of the remaining $250 Billion that was earmarked for TARP… For new readers, TARP, is: Troubled Assets Relief Program… This was supposed to be money spent on toxic bonds that banks had on their books that were keeping them from making loans, because so much capital was tied up in reserves VS these toxic bonds…

Then King Henry (U.S. Treasury Sec. Henry Paulson) changed horses in the middle of the stream, and decided that he wasn’t going to buy toxic bonds, but instead, put money in banks with bank preferred stock as collateral… And all the while I kept arguing that this was a BIG mistake! Letting the Gov’t get involved in banks… I warned everyone what would happen, and then this morning I saw a heading go across the screen that illustrated what I was talking about months ago… The headline said, “Gov’t wants control of executive pay and dividends in exchange for TARP funds”…

And… Then finally on TARP, this is the thing that gets me the most, folks… The money was given with the wink and nod that the Banks would loan it out… The Gov’t put nothing in the agreements that REQUIRED banks to make loans! DOLTS! But, it is what it is… And now the banks have taken the cash and stored it away for a rainy day! But I’ll tell you this now, so you can hear me now and listen to me later… Banks HAVE to make loans… It’s in their constitution!

This is where I get all buggy eyed when I hear people that should know better, say “there will be no inflation from the injections of cash into banks, because they aren’t loaning it”… Well, that’s quite the “short term” view on things isn’t it? I told the radio listeners on the Financial Lifeline Radio Network yesterday, that eventually, banks will have to make loans… It’s how they make their profits! And without profits, the shareholders will be screaming, and then the bank has got real problems! So… When the banks decide to put this cash to work, and I can’t help but think that it will be in the next 3 months, the loans will fly out the door, and the cash will multiply and chase goods that are no longer out there, because Corporations have slowed production during the recession… And what do you have then? Inflation…

And then there was my friend, the Mogambo Guru’s take on all this… Here’s the Mogambo! “This is all, apparently, part of the new Targeted Investment Program, which is government-speak for “new giveaway program that will end up costing the nation whole multiples of actual dollars expended when measured in the sheer tonnage of misery and suffering, or its equivalent; inflation/loss of buying power that all that new money and credit will create, which is not to mention the further cancerous distortion of the economic fabric by the government being an even bigger piece of the economy, especially now that the total amount of government (local, state and federal) spending is already over half of freaking GDP to start with!”

OK, back to me… I just love the way the Mogambo writes!

Well… All that work in charting the highs and lows of Gold last week, went in the dumpster, as Gold has gone down instead of up… But, that shouldn’t do anything but give people a chance to buy Gold at cheaper levels! Speaking of Gold… I didn’t see the article that I interviewed for in the Wall Street Journal… I guess, it just didn’t make the cut!

So… We’re one day closer to the European Central Bank (ECB) meeting, which takes place on Thursday. The question in the markets is whether the ECB does 50 or 75 BPS… I’m on the fence with this, as one day I lean toward 50, and the next toward 75… On one side of the fence, a 50 BPS rate cut would allow the ECB to take advantage of the drop in inflation, but not go on a rate cut binge… On the other side of the fence, a 75 BPS rate cut would allow the ECB, in their minds I’m sure, to keep the euro where it is, weaker that is, and helping the economy at the same time. As we draw closer to Thursday, I’ll probably make a decision, but now… I just can’t come to one!

And then, finally before I go to the Big Finish, really, this time… Economists here in the U.S. have cut their forecasts for GDP growth in 2009. These mental giants have decided that the U.S. recession, that they kept telling us last year didn’t exist, is going to dig deeper and that for the entire year, U.S. GDP will be negative -1.5%… Of course, I’ve gone on record as saying that I believe GDP will hit a low of -5% before it turns around. So… We’ve got that going for us… NOT!

Currencies today 1/13/09: A$ .6685, kiwi .5545, C$ .8175, euro 1.33, sterling 1.46, Swiss .8965, rand 10.1150, krone 7.1250, SEK 8.2170, forint 208.90, zloty 3.1150, koruna 20.1380, yen 89.15, sing 1.4870, HKD 7.7555, INR 49.10, China 6.8345, pesos 13.82, BRL 2.3120, dollar index 83.66, Oil $36.56, Silver $10.62, and Gold… $819.65

Source:  Risk Aversion Reigns Supreme!

Gold fell more than 2 percent on Tuesday as a stronger dollar dented the precious metal’s appeal as a currency hedge, but the platinum group metals rallied as investors hunted for bargains.

Spot gold was quoted at $846.50/848.10 an ounce at 1444 GMT, down from $858.90 late in New York on Monday. However, it lifted off an earlier low of $838.55 as the dollar trimmed gains against the euro after a raft of U.S. data at 1500 GMT.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange were down $10.10 at $847.70.

VM Group analyst Matthew Turner said investors were looking to the currency markets for direction. “A lot of news on physical demand has been quite poor, and that might also be weighing on prices,” he added.

The U.S. currency rose against the euro after a flash estimate of euro zone inflation data came in weaker than expected, increasing pressure on the European Central Bank to cut interest rates.

Analysts said the prospect of an ECB rate cut at the bank’s next interest rate meeting on Jan. 15 was pressuring the single currency, and consequently gold.

A firm dollar reduces gold’s appeal as an alternative investment. However, the U.S. currency trimmed gains versus the euro after data showed U.S factory orders and pending home sales dropped by more than expected in November.

DEMAND FIRM FROM FUNDS

But while the stronger dollar and reports of lackluster jewelery sales weighed on prices, demand for the metal from exchange-traded funds — which issue securities backed by stocks of physical gold — remains firm.

ETF Securities, which operates Europe’s largest gold-backed ETF, said holdings of its Physical Gold exchange-traded commodity rose 2 percent in the week to January 2 to 1.899 million ounces.

Holdings of the world’s largest bullion ETF, the SPDR Gold Trust (GLD), held at a record 780.23 tonnes on Monday.

“Gold is holding (where it is) because of investment demand for gold ETFs, rather than demand from the physical side or as a hedge against the U.S. dollar,” said Commerzbank analyst Eugen Weinberg.

Firmer oil prices, which are holding just below $50 a barrel as supply fears were fuelled by Israel’s incursion into Gaza and a dispute between Russia and Ukraine over natural gas, also lent some support to gold.

Among other precious metals, platinum and palladium rallied to multi-week highs, shrugging off a spate of poor vehicle sales news from car makers, the major consumers of the metals.

Spot palladium was the main riser, climbing 8 percent to a six-week high of $198.50. The metal was later quoted at $194.50/199.50, against $183.50 late in New York on Monday.

Platinum also climbed more than 2 percent to $967.50, its highest level for three months. It was later at $958.50/963.50 an ounce against $946.

“With the commodities basket, people are shifting out of gold and into other commodities that have been under performing lately,” said Commerzbank trader Rory McVeigh. “And palladium is probably the biggest underperformer of the market.”

Spot silver eased to $11.11/11.19 an ounce from $11.22.

LONDON, Jan 6 (Reuters)

But… Then the trading theme entered the picture once again… What brought it back this time, Chuck? Ahhh grasshopper, it was the ADP Employment data that I talked about yesterday morning as a piece of data that gives us a good indication of what the national Jobs Jamboree will look like. And… Unfortunately the ADP printed worse than expected! Stocks immediately began to give back the election day 300 point rally, and the deep, dark, dangerous clouds hovered over the U.S. economy once again. And the rest of the day, the dollar took over the driving duties…

This morning, the Bank of England (BOE) and European Central Bank (ECB) both meet and will both cut rates. So… The thought of lower rates in Europe has added to the weight on the euro this morning, and we’re right back to the trading levels we saw yesterday morning, when I hit the send button!

There are two camps screaming their theories about the ECB rate cut today… In one camp we have the old stick in the mud, “a rate cut debases the currency” crowd. (of which I’m on board with 90% of the time) And in the other camp we have the risk taking “a rate cut will allow the Eurozone to shorten the recession and will be good for the euro” crowd. Hmmm… You know, I’ve seen this kind of perverse way of thinking about rate cuts before… In 2000 and 2001, when the economies of the world were trying to recover after the brief recession in the U.S. that was cut short by the Fed sticking their hands in the cookie jar and acting like they knew what they were doing… Cutting rates to 1% and providing enough liquidity to choke the proverbial horse!

You know… I don’t think I can ever mention the last U.S. recession without going on that tirade about the Fed… Anyway… What I was saying is that during that time the currency markets were rewarding currencies that had Central Banks cutting rates to provide the chance of economic growth. It was the first time I had ever seen that, and I remember my editor of the Review & Focus at that time thought I had “lost it” when I wrote about cutting rates being good for a currency…

The boys and girls over at Citgroup are waving the euro flag again… They issued a letter to clients that said they believed the ECB would cut rates 1% (100 BPS) today, and bring the official rate to 2.75%… They also said that should the ECB cut rates to 2.75%, to buy the euro, as it may rally to 1.33… Of course it’s important to note that the ECB has NEVER moved rates more than 50 BPS before… So, 100 BPS would be a large pile of wood to chop for the ECB, eh?

The euro isn’t the only currency to get whacked by the Trading Theme yesterday… A$ were looking perky at 70-cents before falling back to .6750… And C$ were pushing the envelope on 87-cents only to see their fortunes fade to .8540… And just to prove that the Trading Theme was in play… The only two currencies to gain yesterday… Dollars and Japanese yen!

OK… I know you’ve been waiting patiently for me to discuss the title of today’s discussion… Change… What Change? I was doing some research on the Obama plans yesterday, and just don’t see anything that points to any change in the debt creation. Yes, I know about the gradual withdrawal in Iraq… But that debt isn’t on the radar screen… I’m strictly talking about the Budget Deficit remaining in place and maybe even widening. The research I was reading had this all going on until around 2013… Oh, and the 2009 Budget is forecast right now to be around $800 Billion! Oh, and before any one accuses me of throwing stones at someone who hasn’t even taken oath yet, let me say that I’m just talking about the Budget Deficit, and the economic plans… The public debt is going to get pretty ugly too, all the stuff now in place will be taking the public debt to GDP ratio up to 52% from 37% before the crisis. And that’s on this administration’s bill… With thanks to the Treasury Dept and the Fed!

So… If Change is in order… This is where it need to start! Because, every time we rack up a Budget Deficit, it adds to the National Debt… Which is now $10 Trillion! And yes, the current administration was responsible for adding $4 Trillion to that total!

OK… Enough of thinking about debt… Let’s turn our attention to Gold and Silver, the precious metals… I’ve been talking about the shortage of physical precious metals for some time now. The minters aren’t minting… (except the Perth Mint in Australia, announced about 10 days ago that they were going to double their production of physical coins and bars. I guess that should put to bed all that internet talk about how the Perth Mint didn’t have the bullion to back up their pooled holdings… I wonder what that guy, I won’t even mention his name, because he’s been so wrong about all of this, but I wonder what he has to say now?)

Again, off on a tangent… Where was I? Oh! The minters aren’t minting, and suppliers don’t have any supply, etc. The only time a supplier comes up with some physical metals, it’s because a customer has sold their holdings. We have a list of names of people that want physical metals… And we’ve got nothing to show them… BUT! I put my thinking cap on… And thought… Hey, Chuck! You always tell crowds when you speak at Conferences that they can buy pooled and always have it fabricated to coins and bars later… Well… This is what we should be doing right now! Buy pooled so that you lock in your price now, and when (someday this will happen, when? I don’t know! But someday!) the supply is back to normal… Fabricate the holding then… You’ll have to pay the fabrication costs at that time, but if you had bought allocated coins and bars in the beginning you would have paid for fabrication, so there’s no difference! (fabrication is the actual minting of the coin or bar, and runs about 5% for Gold, and 18% for Silver… It doesn’t cost any more to mint a Silver coin that it does Gold… It’s simply the math in the price difference between the two and the amount of Silver you can buy for the same amount of money in Gold)

So, how about that idea? WOW! It sure pays to put the thinking cap on, eh?

OK… I’m getting near the time to go the Big Finish, and the BOE or ECB hasn’t announced their rate cuts yet. This always happens… I get the Pfennig out at its normal time, and the BOE and ECB haven’t announced yet. That’s OK… Because you read the Pfennig, and your neighborhood friendly Pfennig writer tells you that the BOE will cut rates by 1% today, while the ECB will opt for 50 BPS… That’s my call… We’ll see if I was right, and of course if I’m wrong, I’ll get 50-100 emails telling so! That’s OK… I deserve it, as long as the email isn’t nasty, it’s fine…

Currencies today 11/6/08: A$ .6810, kiwi .5980, C$ .8515, euro 1.2830, sterling 1.5850, Swiss .8540, ISK (no quote) rand 9.75, krone 6.7890, SEK 7.80, forint 203.25, zloty 2.7750, koruna 19.28, yen 97.90, baht 35, sing 1.4840, HKD 7.75, INR 47.68, China 6.8250, pesos 12.73, BRL 2.1350, dollar index 85.44, Oil $64.25, Silver $10.40, and Gold… $741.67

That’s it for today… Risk takers one day, gone the next day… This is driving me crazy, all this volatility! WOW! The Bank of England just slashed interest rates by 150 BPS! 1.50%! To 3%! WOW! What a cut! I guess that desperate times call for desperate measures, eh?

Source: Change… What Change?